At the height of the bank panic, it seemed that we were on the verge of a cataclysmic unwinding of the once-roaring financial system. Now we seem to have settled uncomfortably into the backseat of an economy sputtering along feebly.
Earlier this summer, Federal Reserve chairman Ben Bernanke discounted the chances of a double dip; now he calls the outlook “unusually uncertain.” And when the Fed spoke—last week it warned of “high unemployment, modest income growth, low housing wealth, and tight credit”—markets fell.
The near-term bad news is accompanied by the sense that we have entered into a lingering malaise. Deflation is the concern of the moment, gold the favored hedge of the hard-core pessimists. As a lecture by Harvard economic historian Niall Ferguson, a believer in the inevitability of American and European decline, puts it: “It’s quite a short ride from here …” (cue slide of Thomas Cole’s The Consummation of Empire) “ … to here” (slide of Cole’s Desolation).
Yet if the last two years have toppled confidence in unhindered progress, it’s worth considering as well that they have also given us plenty of cause to doubt the economic consensus, whether positive or negative. Just as nobody has figured out how to fix the economy, no one has figured out how to reliably predict its changes in direction. Nearly a decade ago, a paper from the International Monetary Fund noted drily that the record of economists at predicting recessions was one of “virtually unblemished” failure. Since then, things haven’t changed all that much. Of 54 leading economists consulted by Business Week for its 2007 survey of economic forecasts, only two predicted that the country would hit a recession in 2008. Well, it certainly did.
The record on the way up is not really better. For year after year in the late nineties, economists consistently underestimated the strength of the boom. And for those in the press tasked with interpreting the expert wisdom, things may look even worse. A year and a half ago, when the Dow had just scraped a bottom of 6,547, Times columnist Thomas Friedman compared the magnitude of the economic challenge ahead to the world-shaking changes of August 1914. The challenge is still there, but it doesn’t seem as apocalyptic.
Whether the economy is roaring or retreating, its movement always produces the illusion of inevitability. During the technology mania of the nineties or the housing mania of the last decade, the long boom looked like the new normal. Now the consensus is that the new normal is a fidgety recovery at best. Or, worse, maybe a slow, Japan-style economic seepage, or Rust Belt–style national decline.
Whether we’ve actually entered such a dreary era or are just at a low point in a cycle will be clear only in hindsight. But whatever the new normal may be in terms of our material well-being, it will be something of a psychological rough ride. Even before the crash, the popularity of books like Nassim Taleb’s The Black Swan pointed to a waning confidence in our predictive powers. If it was stretched and sprained before, it is fully torn now. For better or worse, we’ve lost a certainty that no uptick in the economy will quickly restore.